Question

Suppose you sell a fixed asset for $127,000 when its book value is $147,000. If your companys marginal tax rate is 21 percent what will be the effect on cash flows of this sale?

Answer 1

Solution :

Statement showing calculation of After Tax Cash Flow from the sale of the Fixed Asset :

Sl.No.	Particulars	Amount
1.	Sale value of the Fixed Asset	$ 127,000
2.	Less : Book value of the Fixed Asset	$ 147,000
3.	Loss on sale of Fixed Asset = (1) – (2)	-$ 20,000
4.	Tax Rate	21 %
5.	Tax savings on loss of sale of Fixed Asset = ( $ 20,000 * 0.21 )	$ 4,200
6.	After Tax Cash flow from sale of the Fixed Asset = Sale value of Fixed asset + Tax savings on loss of sale of Fixed asset = $ 127,000 + $ 4,200 = (1) + (5 )	$ 131,200

Thus the After tax cash flow from sale of Fixed asset is = $ 131,200